The value of residential building plans approved by the City Council of Nairobi more than doubled last year as stagnating returns from commercial buildings saw construction drop by eight per cent.

Property dealers said developers were shying away from commercial real estate in favour of residential buildings which have a shorter payback period. Data from the Kenya National Bureau of Statistics shows that the value of residential building plans rose from Sh66 billion in 2010 to Sh154 billion last year. The value of commercial building plans approved by City Hall dropped eight per cent to Sh57 billion last year, from Sh62 billion in 2010.

“The price of land in the city centre has remained high due to speculation, this has pushed most investors away to the residential market,” said Mr Peter Kimeu, the head of projects administration at Housing Finance. Mr Kimeu said the selling price of commercial space has stagnated at between Sh11,000 and Sh15,000 per square foot since 2008 due to building of commercial houses in surburbs close to the city such as Westlands, Upper Hill, Kilimani, and along Mombasa Road, increasing supply of office space and shrinking rental returns. Many businesses have re-located to these suburbs, cooling off demand for office space in the central business district.

Recoup investment

A developer who puts up offices in a place like Upper Hill, where the price of an acre of land is between Sh152 million and Sh200 million, would take more than 20 years to recoup his investment compared to between 10 and 15 years in residential areas which have lower land prices.

“The cost of constructing one square metre of commercial space is very high making residential houses the choice for investors,” said Mr Daniel Ojijo, the managing director of Mentor Group Holdings, a property consulting firm based in Nairobi.

The cost of constructing one square metre of commercial space is Sh60,000, compared to Sh40,000 per square metre of residential space. “The high value of the projects was also driven by low interest rates for most parts of last year that saw the emergence of many mid-income market residential schemes,” said Farhana Hassanali, a property development manager at Hass Consult.

The shilling lost 30 per cent to trade at 107 units to the dollar from a high of 81, pushing up prices of construction materials such as steel and cement.

Nairobi’s continued growth as East Africa’s commercial hub has been attracting multinational corporations, raising demand for land in the city centre which has added to the prices of land, pricing out some investors.

“In the last two years people have been buying their own plots to build after it became apparent that they cannot afford houses or mortgages,” said Mr Kimeu.